BoJ ups support for SMEs

Chris Scicluna
Emily Nicol

With news from the National People’s Congress that China’s authorities plan to impose national security legislation on Hong Kong, Asian stock markets have ended the week with losses across the board. Inevitably, the Hang Seng led the way, and it’s currently down more than 5.0%. But China’s CSI300 closed down more than 2.0% as the Government Work Report dropped the GDP target for the year, committed again to a “prudent” monetary policy “in a more appropriate and flexible way”, and also indicated a higher fiscal deficit.

In Japan, however, the Topix closed down a more moderate 0.9% to end the week up 1.65% as the BoJ announced details of its new fund-provisioning measure to support SMEs and extended its extra purchases of CP and corporate bonds into next year. The latest Japanese economic data were inevitably weak, however, with the BoJ’s target measure of core inflation falling back into negative territory and department store sales figures confirming a record decline last month (details below).

The news out of China has also seen European equities open down more than 1.0% this morning while USTs are inevitably stronger with the curve flatter (10Y yields currently down 3bps to around 0.64%). JGBs largely made gains too. In Europe, the picture is mixed, although Gilt yields have fallen further across the board, with 5Y yields now down another couple of bps to about -0.03%, having traded in negative territory yesterday for the first time ever. That’s come after this morning’s UK economic data reported a record decline in retail sales along with a record blowout in government borrowing too.

A busy end to the week in Japan brought an unscheduled BoJ meeting, as well the first insights into spending (or the lack thereof) at the start of Q2 as well as the confirmation of a return to negative inflation.

Against the backdrop of a deteriorating economic backdrop and a jump in bankruptcies over recent months (up 15%Y/Y in April), the main focus of the BoJ’s monetary policy meeting today was on its further support for firms, as it unveiled a new lending programme specifically to support small and medium-sized enterprises. In particular, the new facility will see the BoJ lend up to ¥30trn of interest free loans to commercial banks for up to a year on condition that they lend the funds on to SMEs (to place that in context, the amount of outstanding loans to small corporations rose in Q120 by ¥1.75trn). And to further incentivise banks to lend, the BoJ will apply an interest rate of 0.1% to the amount of funds drawn under the facility on their outstanding current account balances held at the central bank, with twice as much of the outstanding loans to be included in the Macro Add-on balance (subject to 0%, rather than the negative deposit rate).

The Policy Board also decided to extend previous measures taken to support firms – increased purchases of CP and corporate bonds and the Special Funds-Supplying Operations to Facilitate Financing in Response to the Novel Coronavirus (COVID-19) – by a further six months through to March 2021. If fully implemented, these three measures to support the funding of firms – now referred to as the Special Program to Support Financing in Response to the Novel Coronavirus –will total ¥75tn.

In terms of its other measures, having removed the upper limit on its potential JGB purchases last month and previously increased significantly its ETF and J-REIT purchases, the BoJ left unchanged its main key policy parameters – i.e. the policy rate at -0.1% and the 10Y JGB yield target at 0%. And, unusually, the BoJ’s policy statement didn’t provide an economic update, while there was also no post-meeting press update.

After Q1 GDP figures earlier this week confirmed a return to deep recession at the turn of the year, recent economic data have inevitably pointed to an even sharper drop in economic output in Q2 as the country entered a state of emergency in April. And with department stores having subsequently reduced opening hours or temporarily closed to comply with government recommendations, and the number of overseas visitors having fallen off a cliff, today’s sales figures for last month inevitably revealed a record hit. Indeed, total store sales were down a whopping 72.8%Y/Y, with sales of clothing and accessories down more than 80%Y/Y, while household good sales were down 60%Y/Y.

The latest CPI figures out of Japan overnight offered no major surprises either. In particular, headline inflation fell 0.3ppt in April to 0.1%Y/Y, the lowest since October 2016. But when excluding an upward impulse from fresh food prices (6.7%Y/Y), the BoJ’s forecast measure of core inflation fell a steeper 0.6ppt to -0.2%Y/Y, the first negative reading since 2016. This in part reflected a notable drop in energy inflation, as gasoline prices fell more than 9½%Y/Y. So, when excluding both energy and fresh food prices, the BoJ’s preferred new core measure remained in positive territory at 0.2%Y/Y. But the internationally comparable measure of core inflation (excluding food and energy) also fell back into negative territory -0.1%Y/Y, the lowest of the major economies.

While part of the weakness in April reflected the extension of free education to High Schools (school fees knocked 0.1ppt off headline inflation), there was also a further notable decline in hotel charges, which fell at the steepest annual rate since the series began in the early 1970s. And so services inflation posted the steepest decline since 2010. And with surveys pointing to weakening labour market conditions, services inflation will likely fall further into negative territory over coming months. Moreover, with energy to become more of a drag over coming months, we expect inflation to follow a downward trend over coming quarters too.

A busy end to the week for UK economic data has brought further alarming indicators in the form of April’s retail sales and public finances figures, as well as an update on consumer confidence.

Retail sales fell 18.1%M/M in April, unsurprisingly the sharpest drop on the series following the decline of 5.2%M/M in March. That left them down 22.6%Y/Y, also inevitably a record fall given the lockdown that forced closures of ‘non-essential’ stores throughout the month. Sales in almost all sectors dropped, with the principal exception being non-store (largely online) sales, which jumped 18.0%M/M to account for almost one third of the total. Sales at alcohol stores also rose (+2.3%M/M having risen by more than one fifth in March) as some consumers responded to the lockdown by hitting the bottle. But having jumped more than 10%M/M the prior month, supermarket food store sales dropped 2.8%M/M in April. And among the dreadful results elsewhere, clothes store sales halved last month having already dropped by more than one third in March. Household goods sales were down more than 45%M/M following a near-9%M/M fall the previous month.

While the principal cause of the terrible retail figures was the lockdown and fears of the coronavirus, the jump in unemployment and uncertainty over the outlook will have played a role in restraining spending for many households. Indeed, the GfK’s flash estimate of consumer confidence in May edged back down 1pt from April to -34, matching the low of the financial crisis in 2008 and just 1pt above the series low 30 years ago. Little was changed within the detail of the survey, with consumers only a touch less willing to make major purchases than they were in the previous two months (when the respective indictor reached a record low) but also slightly more downbeat about economic conditions.

Given the exceptional fiscal policy response to the pandemic, the latest public finances figures reported record levels of borrowing. In light of the difficulty faced collecting data during the lockdown, the ONS emphasised the figure for central government net cash requirement as the most reliable. And this reached an extraordinary £63.5bn last month, up £73.3bn from a year earlier and the highest cash requirement in any month ever, despite the fact that April would in normal times be expected to bring a surplus. With the BoE buying Gilts at a pace of £13.5bn per week, however, the extra supply was more than adequately absorbed and failed to prevent the steady downwards drift in yields.

Within the detail of the public finances figures, VAT cash receipts were strikingly negative, as repayments (which were made by the government as usual) exceeded payments by firms. In addition, corporation tax receipts more than halved, while income tax receipts fell by one fifth. At the same time, total net cash outlays by the government almost doubled. Meanwhile, public sector net debt (excluding public sector banks) reached almost £1.9trn (or 97.7% of GDP) at end-April, up more than £118bn (or 17.4ppts of GDP) from a year earlier, representing the steepest year-on-year increase in debt as a percentage of GDP on record.

With the government’s support policies (including the Job Retention Scheme) being extended through to the autumn, economic output contracting at a record pace, and losses from government lending guarantees set to rise along with unemployment benefits and other costs of deep recession, government borrowing will remain astronomically high over coming months, and could well surpass £300bn for the fiscal year as a whole.

Euro area/US:
With no economic data from the region scheduled for release today, the main focus in the euro area today will be the publication of the minutes of the end-April ECB Governing Council meeting. At that meeting, the ECB cut the interest rate on the forthcoming TLTRO-iii operations and launched its additional new PELTRO funding scheme, but left the asset purchase programmes unchanged. ECB Chief Economist Lane will also speak at a virtual event on ‘Inflation: Drivers and Dynamics 2020’. No top-tier data are due from the US either.

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